It’s a Catch-22: to start your business you need capital, but in order to raise capital, you need to have a business. For those of us who don’t plan to raise venture capital anytime soon, is debt (like a bank loan) the right route to take?
To find out, we asked eight successful entrepreneurs from the Young Entrepreneur Council (YEC) the following question:
Q. What pros — or cons — should you weigh when considering getting startup capital in the form of debt (whether in the form of bank loans or even friends & family)?
Their best answers are below:
1. Debt Capital
Because debt doesn’t dilute your company, debt capital is a great choice for many startups. One downside to debt is its lack of added value. Although venture capital funding leads to connections, networking opportunities and mentorship, debt funding is money only — no added benefits. For new startups looking to build their startup ecosystem and gain valuable support, this can be a real concern.
- David Ehrenberg, Early Growth Financial Services
2. Future Investors
First-time entrepreneurs often look to loans for initial capital. However, if the startup grows successfully, it will likely require future rounds of funding. Many experienced angel investors and venture capitalists see existing debt as a red flag that lowers their chances of investing in your startup.
- Neil Thanedar, LabDoor
3. Interest Costs
Debt means interest. Even if you’re dealing with a family member, you should make a point of paying interest. That interest can make your startup costs much more expensive than they might have been otherwise. You need to keep debt to an absolute minimum, even if you can’t avoid it entirely.
- Thursday Bram, Hyper Modern Consulting
Money is the most tangible investment in your company. Unfortunately, sweat isn’t worth its weight in gold until it produces money. I suggest you get traction first and show that your product can make money, then you’ll have more leverage at the negotiating table. A person with money invested will want to see returns quickly, which could be to the detriment of good, timely decision-making. – Andy Karuza, Brandbuddee